New transportation networks set to bring US shale fuels to market

Surging energy production in North America is prompting
billions of dollars of investment next year on pipelines and
other infrastructure projects to move oil and gas around the
continent.

The existing US pipeline network isn't configured to fully
serve the new production areas in the center of the country,
from North Dakota to South Texas, where oil and natural gas
production have started booming. As a result, companies are
finding creative ways to move those fuels to market, including
a return to early 1900s favorites: iron horse and barge.

The number of oil-laden tanker trains has grown, as has the
number of river barges pushed by tugboats down the Mississippi
River. Oil pipelines that once pumped crude north from the Gulf
Coast increasingly are being reconfigured to flow south to
refineries there.

Some natural gas pipelines originally built to ship fuel
from the Rocky Mountains and Gulf to the East Coast are little
used because of new natural gas discoveries in Pennsylvania.
Those pipelines are being considered for conversion to handle
oil.

"Our infrastructure over the past 40 years has been set up
for this idea of the US as an energy-deficit nation," said
Joseph Stanislaw, an independent senior energy adviser to
Deloitte. "Now we have this tectonic shift where we can become
an energy surplus nation. That means we have to transform,
upgrade and rearrange our logistics."

AECOM Technology Corp., a firm that
does industrial project design, management and
engineering, forecasts that in 2013 as much as $45 billion may
be spent on new or expanded transportation infrastructure,
including pipelines, rail cars, rail terminals and other projects, said Seth Deutsch, an
AECOM senior vice president.

The changes are a boon to railroads, rail car builders and
companies that own and operate terminals for loading and
unloading crude. BSNF Railway, owned by Berkshire Hathaway, has
boosted its oil-hauling capacity from North Dakota and Montana
to nearly 90 million bbl this year from 1.3 million in
2008.

Trinity Industries, a manufacturer of rail cars,, has raised
new-car deliveries this year and boosted its lease-car fleet by
18% since 2000. US Development Group LLC, an oil-terminals
firm, opened a new terminal in a Texas shale region this year
while expanding its St. James, La., terminal.

Over the past four years, domestic oil and gas production
has surged thanks to a combination of technologies, namely
hydraulic fracturing and horizontal drilling, which are
unlocking deposits trapped in shale-rock formations throughout
the country.

There is so much new crude oil production in the central US
that a barrel of crude bought at a key distribution hub in
Oklahoma can cost some $27 less than an overseas barrel. That
has US buyers exploring new avenues to fill up with the cheaper
domestic crude.

"We're moving crude all over the place," said Bill Day,
spokesman for Valero Energy, the world's largest independent
refiner, which this year began shipping 40,000 bpd from
North Dakota via rail-and-pipeline combination to its Memphis,
Tenn., refinery. It also is considering
rail shipments of that oil to California.

Rail cars are proving especially useful for moving crude
from the oil fields to consumers where there are few pipelines
in place able to handle the load. In 2008, there were about
9,500 tanker carloads of oil shipped in the US, according to
the Association of American Railroads, but by 2011 it had
jumped to 66,000 carloads and this year it is expected to top
200,000 carloads.

Moving oil via water is also on the rise. Oil shipments by
barge from the northern U.S. to the Gulf Coast grew to 15.3
million bbl in 2011 from about 3.8 million bbl in 2008, and
will likely top that this year.

Shipping oil via rail is typically more expensive than by
pipeline, however. Loading and unloading rail cars can add as
much as $4.50 to the price of a barrel of oil, according to
data provided by Marathon Petroleum. The transportation costs
of moving oil from North Dakota to the East Coast can add up to
$10.bbl.

Even so, the delivered crude can still be less expensive than
importing it from overseas.

Another factor in gains by rail transport: New pipeline construction faces legal and
permitting challenges from environmental groups. Local
opposition has prevented pipelines from connecting oil fields
in the middle of the country to refineries on the east and west
coasts, said Brad Olsen, an analyst with Tudor, Pickering, Holt
& Co. "As long as there are no pipes to replace imported
high-cost oil on coasts, rail is the only option."

Growing resistance to new pipeline projects makes the use of existing
pipelines more attractive, industry officials say. Last summer,
Enterprise Products and Enbridge completed work reversing the
Seaway Pipeline so it carries crude oil south to Texas instead
of north to Oklahoma.

Houston-based pipeline giant Kinder Morgan said it is
considering taking an underused section of natural gas pipeline
that runs from West Texas to California and converting it to an
oil pipeline. TransCanada is gauging interest in a similar
conversion in Canada.

Spectra Energy of Houston acknowledged the regulatory
challenges recently when it paid $1.25 billion for the 1,700
mile Express-Platte pipeline that can ship up to 280,000 bpd of
Canadian crude to the US Midwest.

"The fact that these assets are in the ground already is a
huge advantage," CEO Greg Ebel said in a recent call with
investors.

Dow Jones Newswires

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